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1. Macroeconomic Policy Pre-Q Eco

2. AD v AS In a macroeconomy, the conditions of Aggregate Demand & Aggregate Supply will determine the equilibrium of prices & total level of output & employment.

3. AD v AS In a macroeconomy, the conditions of Aggregate Demand & Aggregate Supply will determine the equilibrium of prices & total level of output & employment. A macroeconomy therefore has a demand side & a supply side that a govt will try to influence through the use of policy. These are called: Demand side policies Supply side policies

4. Demand Side Policies These are used to BOOST aggregate demand in an economy. They do this by:

5. Demand Side Policies These are used to BOOST aggregate demand in an economy. They do this by: Manipulating total public expenditure to stimulate higher levels of output

6. Demand Side Policies These are used to BOOST aggregate demand in an economy. They do this by: Manipulating total public expenditure to stimulate higher levels of output Manipulating the overall level of taxation which will impact the disposable income available to consumers & what businesses do with their profits

7. Demand Side Policies These are used to BOOST aggregate demand in an economy. They do this by: Manipulating total public expenditure to stimulate higher levels of output Manipulating the overall level of taxation which will impact the disposable income available to consumers & what businesses do with their profits Manipulating the rate of interest (OCR) to make borrowing or saving more attractive to consumers & firms

8. Fiscal Policy This involves varying the overall level of public expenditure & taxation in an economy to impact AD

9. Fiscal Policy This involves varying the overall level of public expenditure & taxation in an economy to impact AD If a govt wants to increase AD in the economy it can increase expenditure or reduce taxes . Eg , in NZ the govt has given the go ahead to build a rail link between Hamilton & Auckland. This will create jobs & demand for all types goods & services during & after the completion of the line.

10. Fiscal Policy This involves varying the overall level of public expenditure & taxation in an economy to impact AD If a govt wants to increase AD in the economy it can increase expenditure or reduce taxes . Eg , in NZ the govt has given the go ahead to build a rail link between Hamilton & Auckland. This will create jobs & demand for all types goods & services during & after the completion of the line. Increasing govt expenditure or cutting taxes is known as EXPANSIONARY FISCAL POLICY

11. Fiscal Policy When you implement Expansionary Fiscal Policy it usually means the budget that the govt has for the whole of the economy will usually be in DEFICIT . This is because it will normally mean that spending outweighs revenue for the govt Task – 5 minutes: Explain how public spending by the govt can create more jobs

12. Fiscal Policy When you implement Expansionary Fiscal Policy it usually means the budget that the govt has for the whole of the economy will usually be in DEFICIT . This is because it will normally mean that spending outweighs revenue for the govt How public spending by the govt can create more jobs

13. Fiscal Policy The opposite to expansionary fiscal policy is CONTRACTIONARY FISCAL POLICY This aims to reduce prices in the economy

14. Fiscal Policy The opposite to expansionary fiscal policy is CONTRACTIONARY FISCAL POLICY This aims to reduce prices in the economy This is done by reducing expenditure on public spending or raising taxes to REDUCE or not create any anymore demand Govt’s may do this if they want to reduce the budget deficit or any debt that the country has.

15. Fiscal Policy The opposite to expansionary fiscal policy is CONTRACTIONARY FISCAL POLICY This aims to reduce prices in the economy This is done by reducing expenditure on public spending or raising taxes to REDUCE or not create any anymore demand Govt’s may do this if they want to reduce the budget deficit or any debt that the country has. Fiscal policy may also be used to reduce inequalities in the country. Tax brackets can be manipulated so that the poor are taxed less & the rich taxed more. Taxing people on high incomes to provide income support to people on low incomes can boost overall spending

16. Fiscal Policy Fiscal policy may also be used to reduce inequalities in the country. Tax brackets can be manipulated so that the poor are taxed less & the rich taxed more. Taxing people on high incomes to provide income support to people on low incomes can boost overall spending Global Inequality Goals

17. Problems with Fiscal Policy Unfortunately, there are some issues with fiscal policy… Task – 4 minutes: Brainstorm some ideas on what problems could occur if a govt employs fiscal policy

18. Problems with Fiscal Policy Difficult to know exactly when & how much to expand public spending or cut taxes by. It could overheat the economy & lead to a bust. For the govt to increase spending or cut taxes, it may need to borrow money . This means that there is less money for the private sector to borrow in order to boost their own growth.

19. Problems with Fiscal Policy Difficult to know exactly when & how much to expand public spending or cut taxes by. It could overheat the economy & lead to a bust. For the govt to increase spending or cut taxes, it may need to borrow money . This means that there is less money for the private sector to borrow in order to boost their own growth. Increasing taxes on income & profits can reduce incentive for people to work. People may expect inflation & start to push for higher wages to protect them from a ‘real’ reduction in living standards

20. Monetary Policy Like fiscal policy, Monetary Policy can be used to expand or contract the economy as a whole ( AD )

21. Monetary Policy Like fiscal policy, Monetary Policy can be used to expand or contract the economy as a whole ( AD ) Monetary Policy is the manipulation of interest rates , exchange rates & the money supply within an economy

22. Monetary Policy Like fiscal policy, Monetary Policy can be used to expand or contract the economy as a whole ( AD ) Monetary Policy is the manipulation of interest rates , exchange rates & the money supply within an economy Expansionary Monetary Policy aims to boost economic activity by boosting the money supply How can you boost the money supply?

23. Monetary Policy Like fiscal policy, Monetary Policy can be used to expand or contract the economy as a whole ( AD ) Monetary Policy is the manipulation of interest rates , exchange rates & the money supply within an economy Expansionary Monetary Policy aims to boost economic activity by boosting the money supply How can you boost the money supply? Lower interest rates

24. Monetary Policy What does this do? Encourages spending as it is cheaper to borrow money on credit as the interest rate is lower & you don’t have to pay back as much.

25. Monetary Policy What does this do? Encourages spending as it is cheaper to borrow money on credit as the interest rate is lower & you don’t have to pay back as much. This also discourages people from saving their money & encourages them to spend.

26. Monetary Policy What does this do? Encourages spending as it is cheaper to borrow money on credit as the interest rate is lower & you don’t have to pay back as much. This also discourages people from saving their money & encourages them to spend . This is a tactic used when the govt wants to lift the economy out of a slump

27. Monetary Policy What does this do? Encourages spending as it is cheaper to borrow money on credit as the interest rate is lower & you don’t have to pay back as much. This also discourages people from saving their money & encourages them to spend . This is a tactic used when the govt wants to lift the economy out of a slump Increasing the money supply will give more people & firms money to spend on goods & services

28. Monetary Policy A way of increasing the money supply is printing more money . This is called quantitative easing

29. Monetary Policy A way of increasing the money supply is printing more money . This is called quantitative easing The money that is printed is used by the govt to buy bonds from the banks This gives the banks more money to be able to lend to businesses & individuals in the hope of boosting the economy.

30. Monetary Policy A way of increasing the money supply is printing more money . This is called quantitative easing The money that is printed is used by the govt to buy bonds from the banks This gives the banks more money to be able to lend to businesses & individuals in the hope of boosting the economy.

31. Monetary Policy CONTRACTIONARY MONETARY POLICY is when the interest rate is raised . This discourages firms & individuals from borrowing as it costs more money to pay back

32. Monetary Policy CONTRACTIONARY MONETARY POLICY is when the interest rate is raised . This discourages firms & individuals from borrowing as it costs more money to pay back This may be put in place if the govt feels the economy has overheated or is going to The govt might sell bonds to banks at very attractive interest rates in order to limit the amount of money they have to lend to firms & individuals.

33. Monetary Policy Exchange rate policy Changes in interest rates can be used to influence exchange rates

34. Monetary Policy Exchange rate policy Changes in interest rates can be used to influence exchange rates If the exchange rate falls & it costs more NZD to buy one GBP , then any transactions from NZ to UK will be more expensive & have a negative impact on NZ balance of payments

35. Monetary Policy Exchange rate policy Changes in interest rates can be used to influence exchange rates If the exchange rate falls & it costs more NZD to buy one GBP , then any transactions from NZ to UK will be more expensive & have a negative impact on NZ balance of payments The NZ govt may now increase the interest rate to attract overseas investors to save in NZ bank accounts , therefore increasing the exchange rate of NZD as there is now more demand for NZD

36. Monetary Policy Exchange rate policy Changes in interest rates can be used to influence exchange rates If the exchange rate falls & it costs more NZD to buy one GBP , then any transactions from NZ to UK will be more expensive & have a negative impact on NZ balance of payments The NZ govt may now increase the interest rate to attract overseas investors to save in NZ bank accounts , therefore increasing the exchange rate of NZD as there is now more demand for NZD The opposite can happen if the interest rates are lowered.

37. Supply Side Policy These are used to boost AS in an economy. They do this by:

38. Supply Side Policy These are used to boost AS in an economy. They do this by: Giving tax incentives to businesses. Encouraging them to set up a new factory in a certain area can be done this way or giving tax relief against investments in research & development of new products & production processes as they may help increase the GDP

39. Supply Side Policy These are used to boost AS in an economy. They do this by: Giving tax incentives to businesses. Encouraging them to set up a new factory in a certain area can be done this way or giving tax relief against investments in research & development of new products & production processes as they may help increase the GDP Providing subsidies is a form of financial assistance paid to businesses or an economic sector to help meet their costs & encourage supply. Farming is a good example of where the govt provides a subsidy.

40. Supply Side Policy Provide paid for training & education to help upskill the workforce to enable them to compete internationally. A well educated & trained workforce can increase productivity Competition policy can help prevent monopolies forming & charging too much for their goods & services

41. Supply Side Policy Provide paid for training & education to help upskill the workforce to enable them to compete internationally. A well educated & trained workforce can increase productivity Competition policy can help prevent monopolies forming & charging too much for their goods & services Removing Trade barriers to encourage mutually beneficial trading between countries. This can encourage production & supply of goods & services & enhance GDP Privatisation is when a govt will sell state owned assets (SOE) to the private sector. They will do this to raise revenues for themselves & also if a private company can produce the good or service at higher quality & at a cheaper rate then it encourages supply & consumption.

42. Supply Side Policy Task – 5 minutes: See if you can think of any NZ eg’s of privatisation

43. Supply Side Policy NZ eg’s of privatisation:

44. Supply Side Policy NZ eg’s of privatisation: Note: sometimes the govt will still own part of the asset here they will enjoy the benefits of being run like a privatised organisation yet still own part of it.

45. Macroeconomic Policy We should now be able to explain every piece of this diagram…

46. Past Paper Q’s – 15 minutes 1. Define ‘supply side policy’ [2] 2. Identify two supply-side policy measures. [2] 3. Analyse two possible conflicts between government aims. [6]

47. Past Paper A’s 1. Define ‘supply side policy’ [2] Macroeconomic policy (1) which is designed to increase the total (aggregate) supply / output / productive capacity of an economy (1). Policy aimed at making markets work more efficiently (1) to encourage economic growth (1). 2. Identify two supply-side policy measures. [2] • a cut in income tax • a cut in corporation tax • a cut in unemployment benefit • education • training • privatisation • deregulation • subsidy • legislation to reduce trade union power

48. Past Paper A’s 3. Analyse two possible conflicts between government aims. [6] Lower unemployment vs. price stability (1) lower unemployment means higher incomes (1) increasing total demand (1) creating demand-pull inflation (1) lower unemployment means less spare capacity (1) wage demands increase (1) wage price spiral (1). Economic growth vs. price stability (1) production increases (1) faster than the increase in resources (1) increase in total demand leads to higher prices rather than increased output & employment (1). Economic growth vs. environmental protection (1) output increases (1) consumption increases (1) causing a rise in external costs (1) example e.g. pollution, destruction of habitats (1).